Direct investment in infrastructure may be “the name of the game” for large institutional investors, but the competitiveness of the market is raising the cost of doing deals to the point of impacting returns.
This was the verdict that delegates heard at Infrastructure Investor’s Global Investment Forum: Hong Kong 2013 today.
Fundraising for infrastructure globally in 2013 to date has already matched the pre-global financial crisis (GFC) levels of 2008, reaching almost $35 billion. Fundraising totaled only $28 billion in 2012, according to Infrastructure Investor’s Research and Analytics division.
However, Andreas Koettering, managing director and head of EMEA infrastructure at the Canada Pension Plan Investment Board, suggested on a panel that the private equity model for infrastructure poses challenges for long-term investors, and doesn't always make sense.
“We want investors with the wherewithal to stay with the asset for a long time, and manage the asset at a low cost and good efficiency,” Koettering said.
Andrea Echberg, infrastructure partner at fund of funds manager Pantheon, disagreed that the private equity model is unworkable, but did concur that it does not work for all types of infrastructure.
Some of Pantheon’s best performing funds have been private equity funds, she said on the panel, but not usually those funds that raised money for core infrastructure. Core managers have tended to overpay and overleverage their assets, she said.
Matthew Lim, senior vice president at Singapore sovereign wealth fund GIC, also concurred that the private equity model does not usually work for core infrastructure with its stable and predictable cash flows. While GIC does consider funds for value-added infrastructure in emerging markets, where GIC itself doesn’t have a presence, about 90 percent of its infrastructure portfolio is through direct investments, usually in core.
Echberg stressed, however, that to do direct infrastructure requires a large and experienced team, which many of Pantheon’s investors “just don’t have the stomach for”. Koettering concurred that to branch into new markets requires a large team on the ground that has spent significant time with both operational partners and government.
“You cannot underestimate the effort it takes to go to new markets like Turkey, India, or Indonesia,” Koettering said. Lim added that at GIC, the infrastructure team spends at least half of its time working at the asset level in direct investments. Since infrastructure investment requires such involvement, Koettering added that larger investors are the better positioned to do it.
The hunger for direct infrastructure investment could be hitting returns, Echberg suggested. Between funds and direct investors, she estimates that there is about $90 billion of dry powder looking for infrastructure deals, while deal flow has fallen to record lows. With everyone looking to get into brownfield assets, prices have been forced up.
“Some investors are buying in at single-digit IRRs, which to me defies the logic of avoiding the fee structure,” Echberg said. “If one thing goes wrong in that asset, it can hurt returns irreparably.”